On June 19 2014, the Financial Conduct Authority (FCA) released a statement entitled ‘Tackling serious failings in firms’. In the statement, the regulator gave details of a new approach known as ‘enhanced supervision’ that it intends to adopt in exceptional circumstances.
Essentially, when there is a serious failure at a regulated firm, and the FCA’s normal procedure would be inappropriate to deal with the issues identified, then the enhanced supervision procedure may be initiated.
Circumstances in which enhanced supervision may be appropriate include:
- A large number of conduct failings within a firm, or failings that are especially significant or occur on a regular basis
- Conduct failings within several different business areas in the same firm
- A firm has a Board of Directors that fails to challenge senior managers over conduct issues
- A key business area within a firm such as Risk, Compliance or Internal Audit has poor management, insufficient resources or insufficient weight to influence the Board
- Other issues regarding how a firm’s Board views the corporate culture
Once a firm has been placed under enhanced supervision, the procedure may involve:
- A review of the firm’s supervision arrangements
- Formal commitments being sought from the firm’s board of directors that certain issues will be addressed and certain actions carried out
- Formal undertakings under section 55L of the Financial Services and Markets Act 2000 for the firm to take a particular course of action, or to cease a particular activity. These are known as Own Initiative Requirements (OIREQs)
- Forcing the firm to vary its FCA permissions in some way, known as an Own Initiative Variation of Permission (OIVOP)
- Preventing the firm from dealing with its assets
- Use of section 166 reviews – indeed the FCA already uses this tool, which involves either the regulator or the firm commissioning a ‘skilled person’ to conduct a review of the firm’s arrangements and identify the extent of the risks posed by the firm
Issues in firms that are subject to enhanced supervision will be reported to the FCA’s Executive Committee on a monthly basis. Enhanced supervision may be followed by an enforcement action, although it will still be the case that enforcement action will often be taken without enhanced supervision having been initiated.
This announcement follows a recommendation from the Parliamentary Commission on Banking Standards that the FCA introduces a new ‘Special Measures’ tool, which would be something of a halfway house between the usual FCA supervision regime and formal enforcement action. The Commission identified that many of the recent problems in the UK banking industry were caused by a failure of corporate governance.
Although the enhanced supervision regime has been developed in response to a review which focussed on the banking sector, the FCA reserves the right to use this approach in respect of all types of regulated firm in the future.